Posts Tagged ‘Venture Capital’

I love the start-up world. I love working with founders and young companies. I love the excitement of working on business ideas that are new and different. I love seeing the success that often comes from this hard work. I’ve never before in my professional life seen a time of such innovation and creativity. At Foundry we see more business plans now than we ever have. And what’s more, more of those business plans are really interesting (and fundable).

It goes without saying that I love the business of venture capital. I love helping entrepreneurs work on their ideas. And I love helping companies figure out how to become as successful as possible. I love the challenge of trying to figure out the next great investment and the energy that comes from working with amazing and creative people.

But I’m worried and I wanted to get it out there.

I’m worried that in all the hype, in all the “we launched our company” events, and “we changed our name again” parties, and “we redid our website – come celebrate!” shindigs, and the SXSW parties, and the hoodies, and everyone who is “killing it!”, that we’re losing sight a bit of the really hard work that is creating and building a business.

I’m worried that in offering term sheets after a single 60 minute meeting, and in pricing early stage deals like they were already late stage successes and most egregiously by constantly running around self promoting and self aggrandizing, VCs are falling prey to a cult of personality about themselves and forgetting that their jobs are to help companies be successful. And as far as I can tell, very few seem to believe what I hold as a fundamental tenet of the venture industry, which is that entrepreneurs come first, not VCs.

Don’t get me wrong. I enjoy a good party (not to mention a good hoodie!). And I recognize the reasons to celebrate important company milestones and in going to industry events like CES and SXSW. And in bringing a bunch of customers, prospects and partners together at a social event. But I feel like I’m hearing less of “did you see XYX company’s great new product” and more “are you going to so and so’s party at ad:tech:”. I’m not exaggerating when I tell you that I’ve received 30 invites to SXSW parties but not a single invite to a panel session at the conference. And when someone tells me that someone is “killing it” (a phrase I think I hear 10 times a day these days), more often than not they mean “doing the job they were hired for”.

I hear more and more stories about companies making a pitch to a VC and having an offer before they walk out of the room (entrepreneurs: do you really want to work with someone who puts so little thought into their investment process that they would do this?). And the way VCs talk about the companies they work with has clearly shifted to be substantially more VC centric (lots of use of “I” and taking credit for company success as something they themselves created rather than participated in or helped with). And, of course, much has been written about rising valuations and the potential risk this poses to particularly early stage companies. Not to mention the increasing popularity of the “party round” where many VCs participate but no one actually takes ownership (also not good for entrepreneurs, in my opinion).

And it feels like a lot of this is for external show. I’m cool; I run a shit hot start-up; I saw [insert big name technorati here] at our company party last night. I’m in such and such company with [long list of other investors] and doesn’t that make me awesome. I’m awesome I’m awesome – look at me!! And not really about building great products or great businesses.

So by all means, lets keep having fun. But let’s also remember that the goal is to build great companies. And please – my fellow venture capitalists – can we take it down a few notches and remember that our role is a supporting one. If you wanted to be the star you should have become an entrepreneur.

A few years ago I was talking to a fellow venture capitalist about an entrepreneur he had previously backed. “That guy should love me!” he exclaimed, “I made him 50 million bucks!” And then moved on to some other topic which I can’t remember because I was numb with disbelief at his previous statement. He backed an entrepreneur who built a business that after a number of years had a very nice exit and he made the entrepreneur money? Obviously his logic is completely backwards. And while I don’t know that many VCs would express such an extreme view of that sentiment I do think that most believe that not only is a healthy VC ecosystem important for entrepreneurship to flourish but that VCs create that ecosystem.

I disagree – Entrepreneurs come first. Not VCs.

Boulder is a great example of this. The local capital base is anemic, but the entrepreneurial ecosystem is flourishing (Boulder is the best city for start-ups, the happiest city in America, etc. – see here for some additional thoughts on why Boulder rocks for entrepreneurs and start-ups). And while one data point doesn’t prove a theory, Boulder is a pretty powerful argument for the notion that capital follows entrepreneurship and not the other way around. And while there were some VCs involved in helping shape the great start-up environment we have in Boulder, don’t mistake participation for causation.

Entrepreneurs are the lifeblood of Venture Capital, not the other way around.

In the latest lob into the morass that has become somewhat of a sport amongst journalists and those that follow the venture capital industry, Carl Schramm and Harold Bradley write in BusinessWeekabout “How Venture Capital Lost Its Way”. The evidence? Venture capital funding is down – from an “astonishing” 1.1% of US GDP in 2000; and in the 3rd quarter of 2009 down 33% from the same period a year earlier. To add to Schramm and Bradley’s collective horror, “two areas crucial to American progress cry out for capital-intensive investment: clean energy technology and biotech. And the VC industry isn’t delivering it. (Info tech, which by now requires few capital investments, still accounts for the lion’s share of those shrinking VC investments)”

While I strongly believe that the venture capital model is (and should be) changing, this kind of journalism, drawn on incorrect interpretations of the data serve only to sensationalize and add little to the real debate on venture capital. It poorly sets up the 2nd half of their article that talks about the VC funding model (more on that in a post later this week). Here’s my view:

Is there a problem with the current market for VC funding?

Comparing anything about Venture Capital to the markets of 1999 and 2000 is a fools errand. Without question, the venture markets (and the markets in general) were completely overblown in that time period. There were too many venture firms and too many companies getting funded. While this might have been good for some VCs that managed to cash in on the bubble (I, alas, was not one of them – my venture career started in the very dark days of late 2001) it was clearly bad for the industry as a whole (none of the participants benefit when an industry goes through a bubble and burst cycle such as the one that venture capital and technology did during that time period – and we’ve been struggling to “normalize” the industry ever since). I’d argue forcefully that we’re still searching for the optimum level of venture capital funding. Schramm and Bradley seem to be relying on a “less = bad” analysis of the funding markets and are completely ignoring the question of equilibrium (whether we’ve reached one, what the right level of funding should be, etc). Markets function optimally when there is balance and while this balance in private markets such as venture can be illusive, we’re much closer to that balance now than we have been at any other time that I’ve been a venture capitalist (and certainly much more so than in 2000).

Are VCs falling short in their funding of CleanTech and Life Science and favoring IT?

Schramm and Bradley site the PriceWaterhouseCoopers study on 3rd Quarter 2009 investing to back up their assertions. Yet the study contains data that completely contradict a number of their key points. In fact event the title of the PWC press release that announced the 3rd Quarter funding results contradicts the conclusions that Schramm and Bradley draw from it: “Venture capital investment increase in Q3 2009 driven by clean technology sector, according to the MoneyTree Report” (I’ve added the italics). The very first paragraph of the release states in part: “The increase in dollars invested was driven by several large rounds in the Clean Technology sector, one of which is the ninth largest deal since 1995. The Life Sciences sector (biotechnology and medical device industries combined) also had a solid quarter relative to other industry sectors, leaving Software as the third highest investment sector, a notable decline in industry ranking.“ I won’t quote it here to limit the length of this post, but if you click over to the press release take a look at the 3rd paragraph which is entirely focused on the shift of capital from IT to CleanTech and Life Sciences. Also missing from the Schramm and Bradley article was that the 3rd Quarter funding totals were actually up from the 2nd Quarter (their article implies that venture funding is falling off a cliff – clearly not the case).

Is there still a market for IT investing?

As an IT investor, of course my answer is going to be a resounding “yes"!” But don’t take my word for it – just look around you at the amazing pace of continued innovation in technology and the Internet. From new ways to communicate (Twitter, Facebook), to new ways to advertise your business (Google, AdMob, etc, etc) to new ways to play games with your friends (Zynga), there’s still plenty of innovation going on in information technology.

What’s sad is that there’s a real debate to be had on the future of venture capital and the changing VC model (see my partner Jason’s take on that subject here). If we drop the pretence that “VC is Dead” perhaps we’ll finally get to the interesting part of the conversation…

Hi, I'm Seth Levine, a Boulder, CO based technology investor and managing director at Foundry Group. While I love technology I’m also a husband, father, avid cyclist, snowboarder and outdoors guy. I live just outside of Boulder with my wife Greeley and our three wonderful kids.